Dealing with debt can be a heavy burden. Whether you’re struggling with a large amount of debt that is becoming impossible to manage or a relatively small amount that’s increasingly difficult to deal with due to a change in personal circumstances, it can be hard to see light at the end of the tunnel. Fortunately, there are some methods of chipping away at debt that can help you reclaim control over your financial future.
This guide will take a look at two of the most common methods of reducing debt – the snowball and avalanche methods. We’ll also look at more structured forms of support, such as Individual Voluntary Arrangements (IVAs) and Debt Management Plans (DMPs), that can be used to help you deal with your debt.
What is the snowball method?
The snowball method simply means paying the lowest possible amount on all of your monthly debt repayments, while focusing on clearing the smallest debts off in full, one at a time. As you may have guessed, the snowball method is so named because as you start clearing your smaller debts, your monthly repayments will increase as you begin to focus on the larger ones. Metaphorically speaking, this resembles a snowball gradually increasing in size as you roll it down a hill.
So, how does this method work in practice? Well, say you currently have the following debts:
- Car finance debt (APR 10%): £5,000
- Personal loan debt (APR 21%): £13,000
- Credit card debt (APR 25%): £1,500
Using the snowball method, as well as paying the monthly minimum on all of your debts, you’d concentrate on paying off your debts in full in the following sequence:
- Credit card: £1,500
- Car finance: £5,000
- Personal loan: £13,000
Does the snowball method work?
Predictably, there are both advantages and disadvantages to this method. For many people who have found themselves struggling with debt, yes, this method has worked. This is because, by paying off smaller debts first, debtors are creating a positive psychological win, giving them more motivation to continue their repayment journey and become debt free. With this in mind, the snowball method typically proves particularly effective for those who have tried clearing their debt in the past, only to be demotivated and demoralised by a perceived lack of progress a few months down the line.
However, this method does also have its criticisms. The main disadvantage being that by focusing on debt size, from smallest to largest, you end up neglecting interest rates. This means, while you are clearing your smaller debts, you may end up paying more in interest accrued on your larger debts in the long run. For this reason, this approach is not really suitable for those dealing with large, high-interest debts.
What is the avalanche method?
While the snowball method ignores interest rates, the avalanche method uses them as a foundation. When using the avalanche method you will prioritise paying off debts with the highest interest rates first. This method is designed to minimise the overall interest payments you need to make, potentially saving significant amounts of money in the long term.
So, using the same example of an individual’s debt mentioned above, how does this method work in practice? Well, as well as paying your monthly minimum on all of your debts, you would focus on paying off your debts in full in this order:
- Credit card: £1,500 (APR 25%)
- Personal loan: £13,000 (APR 21%)
- Car finance: £5,000 (APR 10%)
You would pay more towards your credit card debt first because it has the highest APR. Once that’s cleared, you’d use the extra money to pay off your personal loan, and then finally your car finance agreement.
Does the avalanche method work?
While it may not offer the same ‘quick wins’ as the snowball method, the avalanche method aims for long-term financial efficiency. With this in mind, from a strictly financial perspective, this method does represent an effective method of paying off debt. By strategically addressing high-interest debts first, you stand to save money over the course of your debt repayment journey.
However, in practice, this method can feel more of a slog for those implementing it. While the snowball method sees smaller debts paid off quickly, leaving you with fewer creditors to deal with, the avalanche method requires perseverance.
Is the snowball or avalanche method better?
The truth is, there’s no one-size-fits-all solution to the snowball versus avalanche debate.
When dealing with a significant amount of debt, it’s important to consider your financial goals, the actual make-up and structure of your debt, and even your psychological needs before settling on the best way of tackling it. If you require the motivation of seeing tangible progress quickly, the snowball method may be your best option. On the other hand, if you’re more concerned with minimising the amount you pay in interest, the avalanche method may be more suitable.
Of course, it may also be the case that neither approach is enough to help you manage your debt. This may happen if you’ve had a change in personal circumstances which is making it more difficult to make your repayments. Or, depending on the type of debt you’re dealing with, if high interest rates have simply made it impossible for you to properly service all of your debts. If this is the case, additional support in the form of a professional debt management solution may be your best option.
In these circumstances, exploring alternative approaches such as Individual Voluntary Arrangements (IVAs) and Debt Management Plans (DMPs) may be necessary. IVAs are a formal agreement between you and your creditors to repay debts over a set period, often with a portion of the debt being written off at the end of this period. DMPs involve negotiating reduced payments with creditors over a longer period of time, providing a more manageable way to settle debts.